Severfield steels itself for new opportunities

North Yorkshire-based structural steel contractor Severfield (SFR) is the biggest player in its sector in the UK, where it carries out 95 per cent of its work. 

Although contracting is generally a lousy business in terms of margins, its size and experience of delivering complicated projects gives it some sway when pricing jobs.

The company has managed to successfully navigate Covid-19 and this year’s supply chain crunch, which saw the price of steel rise by 97 per cent to $215 (£157) per tonne in the year to July, according to the Office for National Statistics, although falling iron ore prices have since tempered momentum.

Severfield’s operating margin of just over 5 per cent in the six months to 30 September was similar to last year, supporting chief executive Alan Dunsmore’s assertion that steel “is pretty much a pass-through” cost for the company.

Although the speed of price increases in the first half of this year triggered negotiations with clients, “that is now largely done and the market is more stable”, Dunsmore said.

The robust demand that triggered the price hikes has also kept Severfield busy. Its order book has grown by 30 per cent to £393m in the five months to 1 November. Recent wins have included the new Everton Football Club stadium, new bridges for the HS2 high-speed rail link and some large distribution centres.

These have given Severfield good visibility over its workload for the next 18 months, Dunsmore said, meaning it is pretty sanguine about additional cash requirements. Net debt including leases increased by £10.7m from its March year-end to £17.6m as it took on loans to pay for previous acquisitions. Working capital also grew from what Dunsmore described as an “unusually low” level at its March year-end. 

Capital expenditure for the current year is also likely to run above its long-term trend of £6m-£8m to nearer £10m as investments that were deferred last year are carried out. The company has also bought a plot of land next to its HQ, which "fits in with our long-term growth plans”, Dunsmore said.

First-half earnings per share of 2.7p were higher than broker Jefferies’ forecast of 2.3p. It has a target price of 108p on Severfield’s shares, or 13.5 times expected earnings.

The shares currently trade at less than 10 times earnings. Given the strength of its order book and a robust pipeline, this doesn’t look too pricey even in a sector as unfancied as construction. We maintain our buy recommendation.

Last IC View: Buy at 81p, 17 Aug 2021